Friday, May 22, 2009

Carbo Ceramics (NYSE:CRR): Morgan Stanley making a major call

Morgan Stanley is out with a pretty major call on Carbo Ceramics (NYSE:CRR) upping their tgt to $70 from $60. Reits Overweight.

Near-term Haynesville proppant debate could be irrelevant, in Morgan Stanley's view. 2009 consensus EPS has come down to ~$2/shr, a number that they think Carbo could hit even without significant sales into the Haynesville this year. The real debate, in their view, is whether ceramic proppant will become a large part of the Haynesville completion “formula” when the shale play moves into development. Firm sees very good odds that ceramic will build considerable market share in the area once producers start to shift their focus from initial production (IP) to maximizing economics over the life of the well.

What’s new: They recently spent time with several E&P firms in “legacy” ceramic proppant areas in the US who all indicated they were not considering switching away from ceramic, but instead were exploring other less risky ways to reduce costs. They also spoke with service firms accounting for over 80% of CRR’s ceramic sales – all continue to believe in the technical superiority of ceramic and recommend it as the best economic option for high-pressure applications.

Where they differ: Morgan Stanley believes the market is concerned about uncertainty around ceramic’s role in the Haynesville after E&Ps posted decent IPs with cheaper substitutes. But they do not think this debate is key for Carbo’s 2009 numbers. While the cyclical downturn has been unprecedented in its speed and severity, they believe producers generally are acting no differently than in previous drilling downturns. As such, thhe firm expects historical trough-cycle proppant purchasing trends to hold in 2009, which supports EPS at ~$2/shr – without factoring in a material contribution from the Haynesville. Any strength in Haynesville ceramic sales could propel Carbo past our 2009 volume and EPS forecasts. They remain above consensus for 2010/11.

Notablecalls: Take a look what CRR did when Morgan Stanley initiated it with Overweight and $60 tgt on May 4 - the stock shot up 10 pts over the next 4 days.